The Broadbent Blog

2017 budget falters on progress, tax fairness

The major challenge for the federal government in the budget was to maintain its commitment to progressive social and economic policies in the face of criticism from the right for its supposedly profligate fiscal policies and unwise promises to make the tax system more progressive. The government was also urged to trim its sails in the face of pending tax cuts in the United States.

In the event, the Liberals introduced what amounts to a stand pat budget which ducks tax reform, announces only minimal increases to social programs and public services, and unveils an extremely modest innovation and skills agenda.

Much if not most of the “new” spending announced, detailed and profiled in this budget is, in fact, a re-announcement with further detail of spending measures promised in the 2016 budget and detailed in last fall's economic statement. For example the some $1 billion per year in “new” transit funding announced is already in the fiscal plan as opposed to really “new.”

In the last election and in the 2016 budget, the Trudeau government promised to champion the proverbial middle-class “and those seeking to join it” by fighting growing inequality. It increased the tax rate for very high income earners, delivered a modest but equalizing reform of child benefits as well as improved public pensions, and promised to focus on job growth through investments in public infrastructure, innovation and skills..

The 2016 budget modestly boosted federal government spending from 13.6% to 14.4% of GDP or by some $20 billion, much of which went to the new child benefit, increases to old age pensions and to public infrastructure. The 2017 budget, by contrast only minimally boosts program spending (by 0.1% of GDP) which is mainly due to programs which cost more from year to year.

In reality, the budget allocates and details past spending announcements but makes almost no “new” investments. And projections show a decline in program spending as a share of GDP after this year. The Liberal government appears content to have delivered a one-off boost to programs.

This year's federal deficit increases by $5.5 billion to $28.5 billion, but debt as a share of GDP remains stable at a very low level of 31.6% and is forecast to decline slightly. Minister Morneau is more or less sticking to his promise not to increase federal government debt as a share of the economy despite all of the election talk about stimulative spending and the gains of using low interest rates to finance major new public investments.

No new fiscal capacity to fund needed investments

Given his self-imposed fiscal anchor, Morneau would have had to increase taxes to boost spending to meet urgent needs such as health care, child care and support for Indigenous communities. But he has failed to do so. Despite promises to crack down on tax shelters and the closure of some minor tax loopholes, revenues will remain virtually unchanged as a percentage of GDP, rising from 12.0% this year to 12.1% in 2017-18.

The economic case for major public infrastructure investments is as strong as ever given what the Bank of Canada describes as a “persistent economic slack... in contrast to the United States.” While growth will pick up a bit from last year, the unemployment rate is forecast to average 6.9% in 2017.

The government has promised to develop an anti-poverty agenda in co-operation with the provinces. This will mean addressing the ongoing growth of precarious work by strengthening minimum wage and other labour standards, by supplementing the low incomes of the working poor through increases to the now paltry Working Income Tax Benefit, and by undertaking major investments in training for low skilled and other workers impacted by global competition and rapid technological change.

While the budget does announce some very modest increases in investments in skills, there are no increases to income supports aside from some tweaking of Employment Insurance parental and care programs to make them more flexible.

The budget does deliver on a promise to spend $500 million per year on child care, rising gradually over the next decade. While this long term commitment is welcome, this will not put much of a dent in unmet needs or in the high costs of quality care programs outside Quebec.

Most urgently, the government has barely begun to act on its promises to bring about transformational change for First Nations communities through investments in education and basic infrastructure. The budget does commit new investments in Indigenous languages, infrastructure, healthcare, economic development and other programs. It is important to note, however, that the significant housing investments, both on and off reserve, remain backloaded with money not flowing until 2018-2019 and only ramping up thereafter.

Shockingly, the budget fails again to make good on the Canadian Human Rights Tribunal ruling and subsequent compliance orders to close the gap in child welfare funding for First Nations kids and to implement Jordan's Principle. While the budget does make direct reference to implementing the Truth and Reconciliation Commission's calls to action, there is precious little actual action on this important file. For example, no funding has been allocated for a National Council for Reconciliation as outlined in the Truth and Reconciliation Commission (TRC) calls to action 53- 56. This Council would help to set benchmarks for measuring progress made on improving the lives of Indigenous people and on the implementation of the TRC’s recommendations.

The government promises a National Housing Fund to work with the provinces and cities from 2020 to boost investment in affordable housing, but it starts at a very low funding level.

Tackling inequality and promoting greater social well-being will require major federal contributions to a national pharmacare program, and significantly expanded home care and institutional care services for the elderly. In the absence of greatly increased federal transfers, most provinces will struggle to maintain let alone improve health and caring services.

Liberals miss opportunity to act on tax fairness, inequality

The long term fiscal plan shows no increases in transfers as a percentage of GDP, notwithstanding the small recent allocation to the provinces through new health care agreements and increased transfers for training. The gender analysis in the budget fails to note how public services are particularly important to women as workers.

The Liberal government had the resources to act. Significant new revenues could and should have been raised by tackling tax loopholes for the most affluent, as promised in the Liberal election platform. Fairer taxes to fund progressive social programs fight growing inequality on two fronts.

The case for taxing capital income on the same basis as employment income on the grounds that “a buck is a buck” dates back at least to the Carter Commission of the 1960s, but Minister Morneau is silent on tax reform.

The top one percent of individual taxpayers receive almost all of the benefit of the stock options deduction and 87.4% of the benefit of the capital gains deduction. In the case of both stock options and capital gains, only 50% of income is liable to tax. These tax loopholes are costly. Partial inclusion of capital gains in taxable income costs the federal government alone $3.6 billion per year. The partial inclusion of stock options costs $725 million per year.

Innovation agenda a modest start

Innovation was a major theme in the budget, appropriately given our overdependence on the extraction and export of energy and other raw materials and the relative underdevelopment of the so-called knowledge based economy of high-end manufacturing, information technology and sophisticated services.

This transition should be a central focus in the hands on sectoral development policies proposed to Minister Morneau by his Economic Advisory Council. A new innovation strategy should include Made-in-Canada government procurement policies and public equity investments in innovative new companies and a review of the tax breaks that have failed to turn around Canada's lacklustre productivity record.

The budget devotes a lot of print to its innovation strategy, which appropriately focuses on strategic investments and sometimes, equity stakes in new and expanding sectors. However, much of the funding for these investments will come from current programs, and the net increase in federal investments of some $300 million per year will be marginally useful but far from transformational. The government has ignored expert advice to scale back relatively ineffective research and development tax credits to fund more efficient strategic investments.

Total new investments in skills are highlighted in the budget but amount to well under $500 million per year. They include more funding for provincial skills programs, as well as for youth employment programs over the next two years.

Doubling down on private infrastructure bank, lack of clarity on green transformation

The government re-announced its commitment to boost the role of the private sector in infrastructure through a Canada Infrastructure Bank that will receive a total of $2.8 billion in federal funding over the next five years. It provides no further details or reassurances that this will not boost costs and reduce the quality of and access to services as argued by many critics. The private sector “partners” in P3s must borrow at a higher cost than governments and will demand a high rate of return. On a more positive note, close to $1 billion more will be invested annually in transit after 2018-19.

We should not allow the temporary ascendancy of climate change dinosaurs in the United States to distract us from the task of transitioning to a much less carbon intensive economy through major job and opportunity creating investments in renewable energy and conservation. Some small increases to clean energy programs are announced, but there are no details on how a federal carbon charge will backstop provincial measures.

Overall, the budget shows that the Liberal government has progressive intentions, but seems to lack the will to stick to a progressive agenda. Certainly it has failed to deal with a lack of fiscal resources through fair tax reforms and has tailored its ambitions accordingly.